There has been significant press coverage recently suggesting that companies are hoarding cash. It would seem that this is one of the contributory factors affecting low levels of business investment. Directors are loath to part with their hard won cash reserves.
For private company shareholders and shareholders with a significant stake in Plcs this may have a detrimental effect on their ability to claim inheritance tax Business Property Relief (BP), or capital gains tax Entrepreneurs’ Relief (ER); if they gift (BP) or otherwise dispose of their shareholding (ER).
The problem arises as cash rich companies may disqualify their shareholders from claiming these reliefs as they are considered to be investment rather that trading companies. The Institute of Chartered Accountants recently sought clarification on this point from HMRC. Here’s a record of their exchanges:
The Institute’s representations were:
‘Where a company holds an amount of cash which is in excess of the amount which it “normally holds” and there is no evidence of any given project upon which the funds will be expended, then BP relief will be denied as the excess will be treated as an excepted asset.
Members are aware of the HMRC guidance… and this has proved sufficient in demonstrating the position of HMRC. It clarifies that cash balances should be viewed in light of the business’s trading cycle and that businesses should keep evidence of discussions surrounding the intended use of cash balances.
However, in the light of the current economic climate and in order to weather the financial adversity faced by many businesses within the UK, it is widely recognised that businesses are retaining increased cash buffers in case of any further downturn in their trade. This is a widely accepted tactic in surviving a recession to ensure that businesses succeed and reverts to the cliché that “cash is king”.
In this regard, confirmation from HMRC that they are aware of this change in mind-set of business owners and company directors, and look favourably on surplus cash held in this regard, would be extremely useful to our members.’
And HMRC’s response:
‘We understand that due to the financial circumstances in which businesses find themselves, they may choose to hold more cash in case of a potential downturn in trade. We can also confirm that in recent times we have seen this on a more frequent basis where businesses hold cash in excess of what they would traditionally require.
However, our guidance remains the same, and unless there is evidence which directs us to the fact that the cash is held for an identifiable future purpose, then it is likely it will be treated as an excepted asset. Therefore the holding of funds as an “excess buffer” to weather the economic climate is not a sufficient reason for it not to be classed as an excepted asset.’